Hynix Recovery – Not so Soon?

During SK hynix’ October 29 earnings call the company further clarified the status of its Wuxi fab line that was hit by a fire on September 4.  In brief, the company may miss its expected end-November date to recover to full operation.

Interestingly, although DRAM bit shipments declined by 2% because of the fire, revenues increased by 3% thanks to price increases caused by the resulting tight DRAM supply.  This gave the company a revenue boost taking total semiconductor revenues from ₩3.93 trillion ($3.54B US) in the second quarter to ₩4.08 trillion ($3.66B US) in the third quarter.  Not only was this revenue a record number for SK hynix, but margins also reached a record high.

All in all, it was a very good quarter, despite the fire, and perhaps because of it.

The company disclosed that restoration of the air ventilation system and the clean room have been completed and operations have resumed.  Management anticipates that these facilities will reach a normal level of wafer production by the end of November, but warned of the possibility of a delay in this schedule of as much as one month, depending on the delivery schedule of some equipment and the availability of component parts.

SK hynix executives explained that NAND equipment was currently being used to build DRAM to minimize disruption to DRAM customer shipments, but that this move will reduce NAND capacity in the 4th quarter by 25-30% from normal levels.  Although this will cause a decline in bit shipment growth in both DRAM and NAND, NAND shipments are expected to drop by only about 15% thanks to the selling-down of current inventory.

Management expects DRAM fourth-quarter bit growth to be in the “low-teen percent”.  The highest impact from the fire was to PC DRAM since most of SK hynix’ PC DRAM is produced in the Wuxi fab.  PC DRAM  should drop to the mid-20% share of SK hynix’ total revenues in the 4th quarter from around 30% in the 3rd quarter.

Executives said that the reduced NAND bit growth might “improve the overall supply/demand dynamics” of the market.  To The Memory Guy this means that they anticipate a shortage that will increase NAND prices in the fourth quarter.

Management stressed that the use of NAND equipment to produce DRAM is a temporary arrangement to last only until restoration of the Wuxi fab is complete.  Once the Wuxi fab is back to full production this facility will immediately go back to producing NAND, but they stressed that they couldn’t yet specify exact timing of when that conversion would start.  When asked how long the conversion would take, executives said that only a subset of NAND equipment in the subject facility had been converted: not all of it, but only what was necessary to support DRAM production.  This effort, so far, has taken about a month and a half, leading them to expect the conversion back to NAND production to take less than one month.

To this analyst, the use of a NAND line to build DRAM will mean very inefficient use of that facility and its capital depreciation, since the equipment balance of an efficient NAND flash fab is significantly different from that of an efficient DRAM fab.  Hynix will be building its most costly products in that facility, giving the company strong motivation to resume Wuxi PC DRAM production as soon as possible.

SK hynix executives explained that the fire will almost inevitably cause an increase in capital spending to restore the facilities and equipment, but they repeated that it is too early to specify the incremental amount, as restoration work and their insurers’ due diligence are still underway.

Management believes that an oversupply may start after the Wuxi facility ramps to full production, although they believe that competitors have no plans to increase their capacity in response to the fire.  Since SK hynix’ restoration will result in a gradual capacity increase the company believes that a sudden oversupply is not a big concern.

In another conference call held by SK hynix’ parent, SK Telecom, on the same day, executives told investors that SK hynix’ performance would “positively impact SK Telecom’s enterprise value.”